Advanced Search
MyIDEAS: Login to save this article or follow this journal

Building an Optimal Portfolio Consisting of two Assets and Its Efficient Frontier

Contents:

Author Info

  • Florentin SERBAN

    (Department of Applied Mathematics, Faculty of Cybernetics, Statistics and Computer Science, Academy of Economic Studies, Bucharest)

  • Mihail BUSU

    (Department of Mathematics, Spiru Haret University, Bucharest, Romania)

Registered author(s):

    Abstract

    In modern portfolio theory, it is common practice to first compute the risk-reward efficient frontier and then to support an individual investor in selecting a portfolio that meets his/her preferences for profitability and risk. Potential flaws include (a) the assumption that past data provide sufficient evidence for predicting the future performances of the securities under consideration and (b) the necessity to mathematically determine or approximate the investor’s utility function. This paper presents the description of the efficient frontier for a portfolio made of two assets. We use data analysis to obtain two clusters, then, we estimate the risk of each asset corresponding to each class we obtained. Thus, we get the best two assets among the ones we analyzed and for which we will construct the efficient frontier. The originality of our paper consists in the combination of classification theory and risk estimation theory to determine the best assets. To illustrate the efficiency of the method we used, we present a case study which makes reference to the stocks listed at Bucharest Stock Exchange. We consider two stocks with the best features from Bucharest Stock Exchange based on the existent correlation that we obtained by data analyses (for classification), and by the evaluation of the loss repartition (for risk estimation), then we construct the efficient frontier for this portfolio.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: http://www.tje.uvt.ro/index.php/tje/article/download/124/pdf
    Download Restriction: no

    Bibliographic Info

    Article provided by West University of Timisoara, Romania, Faculty of Economics and Business Administration in its journal Timisoara Journal of Economics.

    Volume (Year): 4 (2011)
    Issue (Month): 4(16) ()
    Pages: 231-238

    as in new window
    Handle: RePEc:wun:journl:tje:v04:y2011:i4(16):a05

    Contact details of provider:
    Postal: Str. J.H.Pestalozzi nr. 16, 300115, Timisoara
    Phone: 004 0256 592506
    Fax: 004 0256 5925002
    Web page: http://www.feaa.uvt.ro
    More information through EDIRC

    Order Information:
    Postal: 16 J. H. Pestalozzi Street, 300115, Timisoara, Romania
    Email:
    Web: http://www.tje.uvt.ro

    Related research

    Keywords: risk; selection of assets; principal components analysis; optimization; efficient frontier;

    Find related papers by JEL classification:

    References

    No references listed on IDEAS
    You can help add them by filling out this form.

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:wun:journl:tje:v04:y2011:i4(16):a05. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Romeo Margea).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.